As the second phase of the Sustainable Finance Disclosure Regulation (SFDR) coming into force on 1st of July 2022, investors’ appetite for ESG data has reached new heights.
As a result, the pressure on investee companies and fund managers to provide reliable ESG data is greater than ever. Added to this, an increasing number of investors are divesting from companies that are not ready to provide the ESG data, which is especially challenging for SMEs.
Phase two of the SFDR requires detailed entity and product level 2 disclosures, including the “principal adverse sustainability impacts statement” (PAI). This was initially set to apply from 1 January 2022 but has been pushed back six months, one of reasons being complexity of data sourcing on PAI indicators.
How to tackle the ESG data challenge without limiting your investment options
What you should consider when assessing ESG data providers for SFDR disclosure:
1. Data Completeness
The coverage of ESG data remains patchy. Publicly available data only covers a limited number of metrics, firms and geographies. Moreover, it is currently available only for ‘Blue Chip’ or listed companies. Opting for a proprietary data provider is recommended, especially if you work with a diversified portfolio that looks at less mature corporates and/or SMEs.
2. Data Quality & Transparency
SFDR requires comprehensive data reporting on specific indicators in a timely, consistent and transparent manner. Simply reporting on a selection of ESG data that the firm happens to have on hand is no longer sufficient. Transparency relates to the quality of the data disclosed; explaining data gaps as well as description of the data sources and methodologies. Be aware that some data providers use assumptions to fill data gaps, which inevitably makes the data less accurate and reliable.
When selecting your data provider, make sure that they address disclosure of data across the specific investee companies/fund you are looking at, as well as the indicators.
3. Continuous Reporting and Progress Tracking
Sustainable Finance Disclosure Regulation and EU Taxonomy will require investors to establish ongoing data collection, monitoring and reporting processes from their portfolio, starting with initial mapping, and followed by continued monitoring.
According to the Final Report on draft RTS by European Supervisory Authorities (ESA), the PAI disclosure should be based on an average of four calculations made in quarterly “snapshots” during the year with historical comparisons going back at least five years.
While submitting data on PAI’s, investee companies will also need to disclose information on actions taken and planned in relation to each indicator.
When choosing a data provider, make sure that they address the continuous reporting requirement from the investor perspective as well as the investee companies’ perspective. Your investee companies will need a tool to help them track their internal ESG indicators, targets and create actions to improve their performance and disclose it for SFDR purposes.
4. SFDR Reporting: How to Make it Meaningful
SFDR disclosure requirements on specific ESG indicators are likely to be new for investors, fund managers and underlying portfolio companies. As an investor, think about implementing processes that tackle the challenges for all the participants involved in the process.
At Turnkey, we believe in implementing a bottom-up data management approach, starting with proprietary data from investment portfolio and consolidating it at the fund/product or entity level. This is the most reliable and transparent way to address the SFDR requirements.
Moreover, by establishing thorough ESG data collection and analysis processes you can achieve much more than just ticking the box for the SFDR.
By empowering your portfolio with the right tools to monitor and analyse their ESG data, the investee companies will be able to not only address their legislative demands but more importantly, drive their operational efficiency and deliver tangible financial benefits. This ultimately manifests at exit, in terms of both expediting deal due diligence and the valuation achieved.
How Turnkey Can Help
Turnkey has been working closely for several years with a number of high-profile private equity funds and institutional investors, supporting them in implementing sustainability strategies and ESG data collection across their diversified portfolios and reporting according to various regulatory requirements.
Built on this expertise we have created an SFDR solution based on real time, proprietary data that makes the process easy and beneficial both for investors and investee companies.
Turnkey’s SFDR solution, supported by our dedicated ESG in-house experts makes data collection, analysis and reporting against SFDR requirements easy, reliable and transparent. The key characteristics of our solution are:
- Seamlessly mirrors the SFDR disclosure template, including behind the scenes technical content updates as required
- Digitalises SFDR data collection centrally, gathering data from portfolio companies in a non-intrusive and efficient manner
- Tracks performance year-on-year
- Assigns weighted scoring to apply intelligent analysis to portfolio company responses in order to create a leaders/laggards table
- Identifies areas of fund/portfolio company risks that require active mitigation
- In-depth analytics to drive portfolio operational efficiency and valuation upside
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